fixed at 6.5% or 7/1 ARM 5.375?

[anita50]

Looking to purchase a home. Best rates i have been offered for conventional is 6.5%

Local credit union is offering a 7/1 arm starting at 5.375%

The estimates show about $250 difference in monthly payments.

Extra details:

32 years old work in IT. I expect my salary to nominally increase under current conditions.

Generally havent lived in the same place for more than 2 years since college. Although were talking apartments.(first home purchase)

Edit: I got more details today. its a 7/1 ARM with a 2/5 adjustment cap never exceeding 10.375%

5.375% rate first 7 years

7.375 % 8th year
9.375% 9th year
10.375% 10-30 years

 

[bulldog34667]

@anita50 I’ve always been wary of the ARM

 

[faithhopelove13]

@anita50 If you are comfortable making payments at 6.5% or even perhaps 8%, I would go with the ARM. Right as rates were exploding, I got a 30 year 7/1 ARM at 3.8%. Doing the math, I figured I could afford the home at a higher rate if I'm still in the house when it changes, although I don't plan to be. Also, when my adjustable rate kicks in, there is a cap on the yearly rate increases along with a maximum threshold that the ARM can't go past. Feel like it was a good deal. Got it through a local credit union, which I would highly recommend. Was going to use online lender but didn't like the rates, so changed to credit union at the last possible minute (already under contract) and closed within 20 days. Briefly considered using my bank, but they are absolute trash with rates and customer service.

 

[anita50]

@faithhopelove13 thanks for the reply that is how this ARM I was offered is structured.

7/1 after 7 years the rate can adjust 1 time annually and can never exceed a 2% increase.

I also feel like the possibility of me not being in the home in 7 years is relatively high.

 

[resjudicata]

@anita50 Sounds pretty solid. If rates drop get out of it and move to fixed.

 

[faithhopelove13]

@anita50 No prob and I'll add this as well: if you look at historical 30 mortgage trends, you had like 10% in 1990 and around 2.5% in 2021. Obviously, no one can predict the future, but I would bet that future rates will trend within these bounds, and think very unlikely to go sub 3% again. And of course, there's always the risk you will be forced to stay in home longer than you initially planned, so I would just suggest doing the math to see if you could even afford a higher rate.

And finally, a story: BIL admant that me and wife not buy a home in 2021 and early 2022 because of how expensive and over priced homes were and that we would be better off buying a trailer and living in their moms backyard (with our two babies we just had as well) and riding it out. His theory was that everything was going to crash soon enough. Bought in July 2022 and glad I didn't follow his advice. Rates started to blow up right as we bought and now no one is moving, so in my area things are still just as expensive, but literally no inventory. Paid $370k for my 2007 built ranch 4bdr walkoutbasement 1/2 acre lot house ~$120/Sq ft with 30 year 7/1 at 3.8% I live in a state with high prop taxes, so my total payment with mortgage, taxes, and insurance is around $1,980/month, far better than the ~$2,600/month in rent I was paying for a 1bdr in the big city and just $300 more than the temporary 2bdr apartment I was living in for $1,600/month when I left the big city. Buying the house was an absolute no brainer.

 

[resjudicata]

@anita50 Generally speaking I wouldn’t recommend getting an ARM because of the uncertainty. As long as you’re reasonably confident that you won’t have an issue refinancing if the adjusted rate gets way higher then technically you could do this and probably be ok. Especially if you think you might move by then anyway.

Personally I don’t like the gamble and wouldn’t do it because I’m pretty averse to uncertainty and risk when it comes to our home and making assumptions about the market or employment.